Negative Impacts of Privatization Methods on International Business MethodImpact Restitution...
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Transcript of Negative Impacts of Privatization Methods on International Business MethodImpact Restitution...
Negative Impacts of Privatization Negative Impacts of Privatization MethodsMethods
on International Businesson International Business
Method Impact
Restitution to Emergence of aoriginal owners business class
eager to do internationalbusiness but too
small to matter
Negative Impacts of Negative Impacts of Privatization MethodsPrivatization Methods
on International Businesson International Business
Method Impact
Sale of state property - May transfer welfarestate activitiesnew foreign owners
- Existing managers mayresist new control
Negative Impacts of Negative Impacts of Privatization MethodsPrivatization Methods
on International Businesson International Business
Method Impact
Mass privatization Managers & employees may retain control
State interference may continue
New domestic owners not interested in foreign investors
Soviet Command SystemSoviet Command SystemImpact on Current Impact on Current
EconomyEconomy Command System Current Economy
Taxing “surplus” → Confiscatory taxes Consumption limits → Shortage of retail services Price controls → Prices liberalized, controls
on key products remain
Soviet Command SystemSoviet Command SystemImpact on Current Impact on Current
EconomyEconomy
Command System Current Economy
Vertical integration of → Vertical integration of large firms large firms firms (lack of flexibility) Weak accounting → Weak accounting for
risk and value
Soviet Command SystemSoviet Command SystemImpact on Current Impact on Current
EconomyEconomy
Command System Current Economy
Import substitution → Some import policies substitution
policies remain
Corruption = Corruption
Problems Encountered by U.S.Problems Encountered by U.S.
Investors in RussiaInvestors in Russia
Asset stripping Joint venture partners or companies seeking foreign capital look good on paper but
are in poor shape
(Gazpom)
Problems Encountered by U.S.Problems Encountered by U.S.
Investors in RussiaInvestors in Russia
Extortion Payments for “security
services” can be high.
Marketing and Transportation difficulties, distribution communication difficult,
few stores exist
Problems Encountered by U.S.Problems Encountered by U.S.
Investors in RussiaInvestors in Russia
Control Commercial law regarding
property rights is weak.
Problems Encountered by U.S.Problems Encountered by U.S.
Investors in RussiaInvestors in Russia
So why bother?
U.S. Investors in ChinaU.S. Investors in China
Industries
• chemicals • non-electric machinery
• food products• transportation
equipment
• service firms • consumer goods
U.S. Investors in ChinaU.S. Investors in China
Goals
• avoid Chinese trade • export of low- barriers tech, low cost products• match E.U. and • develop local Japanese competitors’ marketsstrategic moves
• obtain infrastructure contracting work
U.S. Investors in ChinaU.S. Investors in China
Government Requirements (occasional) • technology transfer • hiring and training
local managers• export orientation • location in
designated areas• many industries off • local contentlimits
• use of designated trading and distributionorganizations
ChinaChina More Worry Over Loans More Worry Over Loans
NYT 5/10/02
ChinaChina More Worry Over LoansMore Worry Over Loans
Banking system dominated by four giant commercial banks, all state ownedUnder Mao banks were used to funnel state subsidies to local enterprisesHow much companies received had nothing to do with how much was repaid1999 Government directed $179billion write off (12%) of outstanding loans
ChinaChina More Worry Over LoansMore Worry Over Loans
Foreign banks have less than 2% of all deposits and loans
WTO rules call for opening banking system to foreign competition over the next 5 years
ChinaChina More Worry Over LoansMore Worry Over Loans
Dai Xianglung, Head of Central Bank recently said 25-30% loans are not being repaid Standard & Poor estimates it is 2X as bad as stated, i.e., 50% loans are bad US banks with assets > $1billion just 1.5% of loans are more than 90 days overdue In Japan bank bad loans are not not more than 15%
ChinaChina More Worry Over LoansMore Worry Over Loans
Banks are propping themselves up by issuing more loans at “furious” rate often for vaguely described projects with little discernable effect on improving the economy More stringent rules on loans will push bad loan % even higher Goal = reduce bad loans to 15% in 5 years
ChinaChina More Worry Over LoansMore Worry Over Loans
Bank of China China Construction Bank Industrial & Commercial Bank of China Agriculture Bank of China
Preparing to sell minority stakes to offset bad loansBank of China furthest along – expects to sell stock in HK and NY this year
Bank of ChinaBank of China
NY Times 2/1/02
Bank of ChinaBank of China
Lax banking practices in China:
$320 mio bank funds diverted through unlawful loans, off-the-books granting of LCs and issuing bank bills
Bank of ChinaBank of China
Lax banking practices in Hong Kong:
Scheme to launder $73 mio from Kaiping, China branch
Bank of ChinaBank of China
Lax banking practices in US:
Preferential treatment of “certain” customers: fraudulent LCs, pledged assets sold
$20 mio fine for similar practices in US
Bank of ChinaBank of China
Lax banking practices in Canada:
RCMP investigating money illegally taken from Bank of China ended up in Canada
Bank of ChinaBank of China
“These incidents are only the tip of the iceberg”
“Every bank in China has problems like this.”
Reports from China’s audit office indicate illegal use of 160 bio renminbi ($20 bio)
Foreign Fund Firms Face Foreign Fund Firms Face Hurdles in ChinaHurdles in China
As China joins WTO - European and US fund firms competing to find Chinese partners for access to:
$600 million invested in Chinese stock market
Hundreds of billions stashed away in bank deposits, state pension funds and social security
Foreign Fund Firms Face Foreign Fund Firms Face Hurdles in ChinaHurdles in China
Proposed rules: Joint Venture (very costly) – buy 33%
stake, paid for in cash Buy 33% stake in existing domestic
fund manager; possible increase to 49% in 3 years
Almost all of the 15 Chinese companies have agreements with foreign fund
Foreign Fund Firms Face Foreign Fund Firms Face Hurdles in ChinaHurdles in China
Buying in a 33% stake in Chinese fund managing $1 billion is a steep price
Convince shareholders to pay cash for company they can’t control?
Buying in also buys into past liabilities
Foreign Fund Firms Face Foreign Fund Firms Face Hurdles in ChinaHurdles in China
Setting up joint venture with Chinese funds time consuming and at a disadvantage against the top established Chinese funds
Foreign Fund Firms Face Foreign Fund Firms Face Hurdles in ChinaHurdles in China
Why only these two options? Chinese Securities Regulatory
Commission (CSRC) has limited resources Foreign joint venture creates a new
category requiring another level of regulation
CSRC may also be favoring domestic funds to ensure they are in good shape before partnering with foreign funds
Chinese Multinationals?Chinese Multinationals? Name a famous global Chinese brand?
Tsingtao Beer
Ever heard of: Haier Group?
Chinese Multinationals?Chinese Multinationals?
Haier Group – China’s largest appliance manufacturing company
Haier Group Haier Group
In 1990s opened factories in 10 countries
In 2000 opened $30 mio factory in US
Haier GroupHaier Group Camden, SC plant makes compact
refrigerators sold by Wal-Mart, Home Depot, and others
Captured 30% US market share
Haier Group Haier Group
Shipping from China costly and takes 40 days
Able to put “made in USA” on products Cheap R&D & machinery shipped from
China provide cost advantages
Haier GroupHaier Group Rolling out other products for US:
• Freezers, air conditioners, flat panel TV, DVD players, microwave ovens
US sales about $500mio – 85% imported – US company is profitable